St.

MIRAS COLLEGE FOR GIRLS, PUNE

(University of Pune)
T.Y.B.B.A. (SEM VI)
Financial Services (Course Material)
Prof. Minakshi Balkawade
Unit 2 Indian Capital Market
CAPITAL MARKET
Meaning
The term capital should be interpreted as financial capital and not physical capital.
Definition
1. Livingstone Capital market is a series of channels through which savings of the
community are made available for commercial and industrial enterprises and public i.e.
government authorities.
2. Herbert Dougall Capital market are complex of institution and mechanisms, whereby
intermediate term funds (loans up to 10 years maturity) and long term funds (longer
maturity loans and corporate stocks) are pooled and made available to business,
government and industries and where instruments that are already outstanding are
transferred.
Features
1. It deals in medium and long term funds.
2. Investments in fixed assets.
3. The participants include Govt., Industries, Commercial banks, M.Fs, FIIs, Dev. Banks,
Brokers, Merchant bankers.
4. It is sub divided into: New Issues Market (NIM) and Old Issues Market (OIM)
5. It is also divided into: Industrial Securities market, Govt. Securities Market and Long
Term Loans Market.
Functions/ importance of Capital Market
1. Industrial development
2. Capital Formation
3. It helps in increasing the velocity of circulation of capital
4. Increased employment opportunities and increased standard of living
5. Helps in undertaking infrastructure development
6. Helps in attracting foreign investment
7. A well developed Capital market necessary for the development of money market and vice
versa
8. It facilitates internal and international trade
9. It provides financial assistance to budding entrepreneurial
10. It removes regional balances
11. Economic development

St. MIRAS COLLEGE FOR GIRLS, PUNE

(University of Pune)
T.Y.B.B.A. (SEM VI)
Financial Services (Course Material)
Prof. Minakshi Balkawade
STRUCTURE OF INDIAN CAPITAL MARKET
INDIAN CAPITAL MARKET
__________________________________________________________
Lenders section

Borrowers Section

Credit Instrument
Sub-Market
______________________________________________________________________________
Gilt-edged
Industrial Securities
mediation Securities Market
Market
Market

Development Finance
Market

Financial Inter-

____________________
New Issue Market

Old Issues
Market
(Stock Exchanges)

________________________________________________________________
IFCI

ICICI

SFC

IDBI

IIBI

UTI

___________________________________________________________
Merchant

Mutual

Leasing

Venture Capital

Others
Banks

Funds

Companies

Companies

St. MIRAS COLLEGE FOR GIRLS, PUNE

(University of Pune)
T.Y.B.B.A. (SEM VI)
Financial Services (Course Material)
Prof. Minakshi Balkawade

STRUCTURE OF INDIAN CAPITAL MARKET

INDIAN CAPITAL MARKET
_________________________________________________________________________
Demand for medium and long
Financial Intermediaries
and long term Funds (borrowers)
- M.Fs
(investors/ lenders) (deficit economic units)
- Brokers
(surplus economic units)
___________________
______________________
Corporate
FIIs

Comm.

Govt.

- Merchant Bankers
- Underwriters
-Stock Exchanges
-Issue Houses etc

Difference between Money Market

Meaning
Time Period
Short
Instruments
Credit Instrument
e.g. CDs, CPs
Nature
of Working capital needs
demand
for funds
Institutions/
Brokers, Speculators, DFHI,
Participants
STCI
Sub-market

Supply of medium
term funds

Household
Savings

Comm.
Banks

Capital Market
Long
Financial Credit
e.g. Shares, Deb., Bonds
Fixed Capital needs

Govt., Industries, All India FI, Commercial

Bank, Sharehold FIIs, MFs=Intermediaries,
Merchant Bankers, Registrar to the issue
Call loan MM, Treasury Bill Industrial, Govt., Long
Market

Functions of Stock Exchanges/ Stock Markets

According to the Securities Contract Regulation act 1956 a stock exchange has been defined as
an association, organisation or body of individuals whether incorporated or not, established for
the purpose of assisting, regulating and controlling the business in the buying, selling and dealing
securities.

1.
2.
3.
4.
5.
6.

St. MIRAS COLLEGE FOR GIRLS, PUNE

(University of Pune)
T.Y.B.B.A. (SEM VI)
Financial Services (Course Material)
Prof. Minakshi Balkawade
It provides liquidity and marketability of investments.
It helps in the development of Primary Market.
The indices reflect the performance of the companies which helps the investors in
managing their portfolio.
Signal to the co. about their performance which helps to improve their performance.
Ensures safety of the investors funds.
The stock market also reflects the conditions in the economy i.e. business cycles

Distinction Between
New Issues
1. Functional/
Operational
2. Nature of Contribution
to Industrial Finance
3. Organisational
difference

Secondary
i.e.
Stock
Exchange
The new issues market performs The
secondary
market
the function of helping the provides a regular and
industries to raise fresh capital continuous market for trading.
by the issue of securities.
The Contribution of NIM to The role of the secondary
industrial finance is a direct link market is indirect because
between the issuing co. and the market is essential for the
investors.
existence of NIM.
The NIM has no geographical A Secondary market has
existence.
physical existence.

Limitations of the Indian Capital Market

1. Lack of Integration
There are a large number of S.Es in the country but 70% of the business is concentrated in the
BSE. But the real problem in India is that there is no proper integration between all the SEs
leading to too much variation in share prices in the different stock markets (leading to arbitrage)
2. Scarcity of Floating Securities
Financial Instruments, promoters and foreign collaborations hold nearly 75% of the equity in the
private sector and retain their holdings. Even individual investors are not exposed to wider
portfolio investment but have sticky portfolio habits.
3. Categorization of Shares
The problem of scarcity of floating securities arises on account of classification of
specified and non-specified securities. They provide facility for speculation as carry forward
in them is permitted.
4. Cumbersome procedures of settlement
physical delivery of securities accompanied by transfer deeds i.e. securities should move from
seller to his broker and from the buyers broker to the buyer. This process takes 2-3 months,
which results in frequent delays in making payment for shares.
5. Lack of Professionalism
On the one hand, one can find highly competent and professional brokers playing an active and
positive role in the market. On the one hand, many brokers are found to be lacking in high
professional standards.

St. MIRAS COLLEGE FOR GIRLS, PUNE

(University of Pune)
T.Y.B.B.A. (SEM VI)
Financial Services (Course Material)
Prof. Minakshi Balkawade
6. Unhealthy competition of Merchant Bankers
The increase in the number of Merchant Bankers has led to unhealthy competition and thereby
dilution of quality of issues.
7. Absence of Genuine Investors
Speculative activities outplay genuine trading activities. Some degree of speculation is essential
in the market to promote
establishment of demand and supply equilibrium and stability of prices.But speculation often
degenerates into gambling, when operations are undertaken ignorantly by the speculators to reap
huge profits.Thus,the market is not subject to free play of market forces of demand and supply
and it becomes difficult to judge the performance of the company.
8. Weakness of the Stock Exchange Management
The Governing body of a Stock Exchange has no concern nor the will to introduce necessary
reforms in trading i.e. it does not call for detailed reports about investors complaints.The
Executive Director of the Stock Exchange is essential to ensure strict compliance by all member
brokers of rules relating to margin, trading etc. However being a person appointed by and
responsible to the Governing body, he is unable to perform these functions.
9. Poor response of Indian Households
Lack of confidence of genuine investors in the stock market, an analysis of the portfolio of
Indian households reveals poor response to industrial securities.
10. Dominance of the Public Sector
Because of lack of faith in industrial securities, the private sector has little success in equity
mobilization.According to Prime a premier database on the primary capital market, the equity
mobilization of the Private sector was Rs. 12061 in 1994-95, which reduced to 2919 crores in
1996-97. On the other hand, the public sectors share has been 2.9% during 1995-97. In the debt
segment also the public sector accounted for 87%.To make the matters worse, the investors
association is still a weak body.
Reforms/ Developments in the Indian Capital Market post-1991
Several steps have been taken in recent years to reform the Primary as well as Secondary capital
market, which are as follows:
I. Primary/ New Issues Market Reforms
SEBI has introduced various guidelines for regulating capital issues.
1. Co.s issuing capital are now required to disclose all material facts and specific risk
factors with their projects.
2. New cos estd/ promoted by existing cos are free to price their issue i.e. can issue shares
at a premium provided the promoter company has a 5 yr track record of consistent
profitability.The existing cos coming up with a public issue can price their issue provided
the promoters contribution is 50% on first Rs. 100 crores of issue, 30% on next Rs. 300
crores and 15% on the balance shares held by promoters have lock-in period.
3. SEBI has also introduced a code of advertisement for public issues for ensuring fair and
truthful disclosures.
4. The Banker to the Issue are now brought under SEBI for ensuring investor protection.

St. MIRAS COLLEGE FOR GIRLS, PUNE

(University of Pune)
T.Y.B.B.A. (SEM VI)
Financial Services (Course Material)
Prof. Minakshi Balkawade
5. To reduce the cost of issue SEBI has made underwriting optional, subject to the condition
that in the event of the co not being able to raise min-subscription amount within 90 days
of the issue of the prospectus, the application money shall be refunded.
6. Merchant banking has been brought under the regulatory framework of SEBI. They have
to abide by a code of conduct, which specifies a high degree of responsibility towards
investors in respect of pricing and fixation of the premium, and also now have a greater
degree of accountability in the offer document and issue process. As per 1997-98 reforms
only body
corporates permitted to function as Merchant bankers and not allowed to carry on fund based
activities like deposit mobilization, leasing etc.
7. SEBI has advised Stock Exchanges to collect from cos making public issues, a deposit of
1% of the issue amount which could be forfeited incase of non-compliance of listing
agreement and non-dispatch of refund orders and share certificates by registered post
within the prescribed time limit.
8. SEBI vets (checks) offer documents to ensure that all disclosures have been made by the
co.
9. Issue by way of bonus rights etc to be made in appropriate lots to minimize odd lots.
10. The collection centres should be at least 30 and collection agents not to collect
application money in cash but through Stock Invest.
11. In the case of composite issue i.e. rights cum public issue, differential pricing shall be
allowed, provided justification for such a pricing policy is given.
12. SEBI has raised minimum application size and also the proportion.
13. Introduction of new instruments
a) Convertible debenture/ bonds
b) Callable/ Puttable Bonds/ Debentures / Bond Refunding
c) Bonds with warrants
d) Zero Interest Bonds/ Debentures (ZIB/D)
e) Deep Discount Bonds (DDBs)
f) Option Bonds
g) Floating Rate Bonds (FRBs)
h) Easy Exit Bond with a Floating Interest Rate
i) Regular Income Bonds (RIBs)
j) Retirement Bonds
k) Index Bonds
l) Capital Gain Bonds
m) Secured Premium Notes (SPNs)
n) Foreign Currency Convertible Bonds (FCCBs)
o) Euro Convertible Bonds (ECBs)
p) GDRs Global Depository Receipts
q) American Depository Receipts (ADRs)
14. Stock Invest
An investor can obtain a Stock Invest for amount of application money from his bank and
enclose it along with the application. The amount of stock invest is not immediately debited to
the customers a/c, instead a lien is created on his deposit to the extent of the amount of Stock

St. MIRAS COLLEGE FOR GIRLS, PUNE

(University of Pune)
T.Y.B.B.A. (SEM VI)
Financial Services (Course Material)
Prof. Minakshi Balkawade
Invest.Thus, only in case of positive allotment, the investors a/c is debited, that too when the
letter of allotment is received.
15. Book Building
In 1995, the SEBI, introduced the concept of book-building, which involves selling an issue step
by step to investors at acceptable prices with the help of certain market intermediaries.
16. Insistence of Quality Securities
SEBI has announced guidelines for this. e.g. dividend payment condition, participation of
financial institutions in the issue etc.
17. Freeing of Interest Rates
Interest rates on debentures and on PSU bonds were freed in Aug 1991 with a view to raising
funds from the capital market at attractive rates depending on credit rating.
18. Setting up of Credit Rating Agencies
to award credit rating to securities. E.g. CRISIL, ICRA and CARE etc have been estd, which is a
healthy trend towards a developed cap market and enhancing investor confidence.
19. Mutual Funds
Government has given permission to start Mutual Funds in the Public as well as the private
sector e.g. private sector MFs ICICI Prudential, HDFC MF, Kotak Mahindra, etc.They have
launched various schemes to cater to the needs of different investors e.g. Top 200 Fund, Indian
Sovereign Gilt Technology Fund, etc.
20. Enactment of FEMA, 1999
21. Depositories
To avoid bad delivery, forgery, theft, stamp duty, etc depository system was approved by
Parliament in July 1996.The SHCIL i.e.Stock Holding Corporation of India Limited started
functioning as a Depository with effect from August 1988. Later on, the NSDL and CSDL were
established National Securities Depository Limited.
22. Venture Capital Companies
In the Budget Speech of 1988-89, the Union Finance Minister stated that we have one of the
largest pools of scientific and technical manpower. Yet many of our new and young
entrepreneurs find it difficult to raise Equity capital because of the risk involved. This problem
can be solved by allowing Venture Capital Companies or funds to invest in these risk companies
e.g. IDBI, ICICI, and IFCI.
23. RBI Measures
To revive the capital market which is undergoing a period of sluggishness includes commercial
banks have been permitted to invest 5% of their incremental departments of previous year into
industrial securities.
24. International Listing
The big event in the history of Indian Capital Market is the listing of the Indian companies
shares on American Stock Exchange e.g. The Bangalore based Infosys Technologies shares have
been listed on the NASDAQ under the symbol of INFY.
25. Investment by NRIs in shares, debentures etc permitted.
26. FIIs like Mutual Funds, Investment Cos, Pension Funds etc permitted to invest in India.
27. FDI permitted in certain priority sector industries.
28. SEBI (Disclosure and Investors Protection) Guidelines 2000, issued.
29. Establishment of SEBI by abolishing the CCI.

St. MIRAS COLLEGE FOR GIRLS, PUNE

(University of Pune)
T.Y.B.B.A. (SEM VI)
Financial Services (Course Material)
Prof. Minakshi Balkawade
30. Introduction o derivatives e.g. Swaps options, Forward, Future, Mutual Funds permitted
to trade in derivatives.
31. Action by SEBI against Fly by night Cos.
II.

Secondary Market Reforms

1. UTI brought under SEBI regulations.
2. Depositories Act 1996 passed.
3. Government Undertaking going for disinvestment.
4. E- Stock Exchanges e.g. NSE, OTCEI established.
5. Buyback of Shares by the Cos permitted.
6. Credit rating agencies established: CRISIL, ICRA, CARE.
7. Enhanced level of Corporate governance introduced.
8. Derivatives training introduced.
9. Increased monitoring of Stock markets through Stock Watch System.
10. Market makers introduced in major Stock exchanges.
11. Private sector mutual funds permitted to apply for firm allotment in public issues.
12. Rolling settlement introduced in the stock Market.

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